Income inequality in Australia: are you listening, Joe?

Thank God that Joe Stiglitz has left our fair shores: all that ill-informed, gratuitous advice was really getting out of hand. And all complete tosh: Stiglitz has never come across a problem which is not solved by more government spending or regulation.

The share of national income going to Australia’s top 1 per cent of earners has levelled out for the best part of a decade – and in some cases fallen – to erode claims that inequality is worsening.

The stability in the share of Australia’s highest income earners could continue, as the Abbott government jacks up the top marginal tax rate to 49 per cent by introducing the controversial debt levy.

An analysis of tax data by the University of Melbourne, which is being fed into a global database maintained by French economist Thomas Piketty, shows the top 1 per cent took home 7.7 per cent of total income in 2011.

That ratio has remained virtually unchanged since 2006 and is only fractionally higher than at the turn of the century when it came in at 7.5 per cent.

The data confirms an end to an upward trend that was entrenched between the early 1980s to the early 2000s in the share collected by the highest income earners – a category of around 180,000 taxpayers who earn at least $211,000 and an average of just under $400,000 a year.

The figures also show that compared to Canada, Britain and the United States – where debate about rising inequality has become a mainstream political issue since the global financial crisis – Australia’s top earners take home far less of the national pie.

For instance, in the US, the top 1 per cent collected almost 20 per cent of incomes, one-third more than was the case a decade earlier.

Melbourne University associate professor Roger Wilkins, who ­produced the estimates, said it was an open question how permanent the decline in ­inequality would be, and noted that it appeared linked to the slower economic growth of recent years.

“So to the extent that it’s correlated to slowing economic growth, it’s not such an achievement,” he said.

However, he added that it was ironic that a rising public debate about inequality had coincided with increasing evidence it had declined.

He agreed that decisions by both Labor and Coalition governments to increase the marginal tax rate via levies to repay debt and fund the national disability insurance scheme were likely to create disincentives against people pursuing higher incomes.

“The expectation would be that they act to further moderate top incomes,” Professor Wilkins said.

He cited evidence from economists including Piketty, author of the recent best-seller Capital in the Twenty-first Century, for showing a link between higher marginal tax rates and reduced incomes. “The argument being that the incentives for extracting higher incomes are reduced because you get to keep less of it,” he said.

The latest figures come amid an ongoing debate about whether 22 years of continuous economic growth – and the resources boom of the past decade – have eroded the nation’s traditional egalitarian foundations.

Former Australian National University economics professor Andrew Leigh, now Labor shadow assistant treasurer, is a prominent proponent of the view that inequality has worsened, arguing in his 2013 bookBattlers and Billionaires that it threatens to return to the levels reached in the 1920s.

In a recent review of Piketty’s book for The Monthly, Dr Leigh also pointed out that the three richest Australians have more wealth than the ­million poorest.

Dr Leigh accused the Abbott government of creating an additional threat to equality by reducing the incomes of the poorest single parents by one-tenth. “As Battlers and Billionaires showed, whether we look at earnings, income or wealth, it’s clear that inequality today is substantially higher than in the 1970s,” Dr Leigh told The Australian Financial Review.

“With Australian inequality as high as it’s been in three-quarters of a century, the last thing the nation needs is a budget that widens the gap.”

It’s a perspective challenged by another economist-politician, Angus Taylor, the federal Liberal member for the NSW seat of Hume, who says the use of billionaires in the mining industry as a counter-example against signs of falling inequality is disingenuous.

He said the huge wealth of mining magnates such as Andrew Forrest and Gina Rinehart means they are “complete outliers”, and has little to do with the other 24 million Australians.

A truer test of whether inequality had worsened was to look across all income groups, which Mr Taylor said showed real wages had grown consistently for almost all Australians for 20 years.

“This is a fact that those on the other side of the inequality debate don’t want to accept,” he told the ­Financial Review. He said while Piketty’s historical analysis was extremely interesting, his conclusions were thoroughly wrong.

“Very simply, his insight is that inequality increases when the rate of return on capital is greater than [economic] growth,” he said.

“In this country we’ve had high growth rates and if we hitch ourselves to the high growth markets of the north, which I think we will, our growth rates will remain high.

“People are drawing the wrong conclusions. The conclusion I draw from Piketty’s historical work is that Australia must keep its growth rate high.”

The Melbourne University analysis – done by its Melbourne Institute division – shows there were some 18,000 ­Australians in the top 0.1 per cent of incomes, earning more than $600,000 in 2011-12 and an average of $1.1 million.

Some 1.8 million are in the top 10 per cent, each earning at least $88,000 and collecting nearly 29 per cent of total income. The figures were produced for the World Top Incomes Database, which is hosted by the Paris School of Economics.

Can someone of more economic understanding than me explain why income inequality matters so much?

It doesn’t. Neoclassical theory has no view on income distribution. It will follow marginal productivity, so whenever you hear a neoclassical economist crapping about inequality they’re imposing their own preferences or a bolt-on to the theory.

Individuals with low marginal productivity impose costs on the economy through various other correlations with drug abuse and crime and so on. But it isn’t clear that inequality is the cause of those problems.

It’s always interesting to fly low over the coast around Sydney or look out over Port Phillip Bay on a week day and see how many people are out sailing. Same at the golf course. Australia’s generally good coastal weather allows plenty of people to do other things rather than work fulltime and give half the extra money to politicians to buy votes. I suggest that our high marginal tax rates are a major disincentive to successful people to work harder and employ more people, and this significantly impairs national productivity.

I wish the LNP would attack this policy area with more venom. Just update PM Thacher’s approach with current details (i.e. the “poorest” have wide screen TVs, access to cheap education and health care, social security etc) and give the lazy left both barrels.
For heaven’s sake, how simple is it to sell “it’s not the gap, stupid” message?

The silliest stuff is the stats like ” the richest 3 Australians have as much wealth as the poorest 1 million”. So if they had wealth equivalent to only the poorest 500,000 it would be okay?

It’s funny how they always assume that the top are somehow doing something wrong or immoral. Does it ever cross their mind that maybe the bottom are lazy and incompetent or that perhaps Governments have screwed things so badly with regulations and fiscal incompetence that a permanent underclass is inevitable?
Zero sum economics dolts are soooooooooooo tedious.

It doesn’t. Neoclassical theory has no view on income distribution. It will follow marginal productivity, so whenever you hear a neoclassical economist crapping about inequality they’re imposing their own preferences or a bolt-on to the theory.

Can’t wait for Stiglitz paper on how the distribution of the Obamaphones resolves the inequality justice dignity ratio he has built his thesis on.